The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that income from the sale of converted land was assessable as capital gains, rather than business income, after finding that the taxpayer had consistently treated the land as an investment.

The bench of Dr. BRR Kumar (Vice President) and Tapas Ram Misra (Judicial Member) deleted an addition of ₹49.64 lakh relating to income distributed by business trusts, holding that the dividend component was exempt in the hands of the unit holder where the underlying special purpose vehicles (SPVs) had not opted for the concessional tax regime under Section 115BAA of the Income Tax Act, 1961.

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The bench directed the Assessing Officer to verify the period for which the land had been held before deciding whether the gain was long-term or short-term.

The taxpayer filed her income tax return for assessment year 2023–24 declaring total income of ₹16.68 crore. Her case was selected for complete scrutiny, principally because of the large turnover in securities, depository accounts and mutual funds compared with the figures reflected in the return.

During the assessment, the Assessing Officer examined transactions involving land jointly owned by the taxpayer and a co-owner, with each holding a 50% share.

According to the Assessing Officer, the taxpayer had purchased agricultural land, converted it into non-agricultural land and sold it in smaller parcels. The officer viewed the frequency and manner of the transactions as similar to the activities of a land developer and concluded that they amounted to an “adventure in the nature of trade” under Section 2(13) of the Income Tax Act.

The officer consequently treated the entire sale consideration of ₹3,92,68,000 as business income.

The taxpayer maintained that she was an investor and had acquired the land using her own funds. She said the larger parcels had been divided and converted because they could not be sold as large plots.

She also stated that, during the relevant year, she had executed four sale deeds, made no fresh land purchases and sold all the parcels to a single buyer, Anantbaug Plantations Pvt. Ltd.

As an alternative argument, she submitted that even if the transaction were treated as a business activity, the acquisition cost of ₹3,07,07,422 should be deducted and only the resulting income brought to tax.

The Assessing Officer rejected that argument, reasoning that the land had been purchased in earlier years and that the related expenditure should have been disclosed in those years. The entire sale consideration was therefore added as business income.

The Commissioner of Income Tax (Appeals), or CIT(A), upheld the addition and the denial of the acquisition cost. The taxpayer then approached the Tribunal.

The ITAT found that the taxpayer had filed detailed written submissions and supporting annexures before the CIT(A) on September 11, 2025, but those submissions had not been noticed while the appeal was decided.

The bench also examined the taxpayer’s treatment of the land in her accounts and returns. It noted that she had consistently treated land as an investment and reported income from its sale as short-term or long-term capital gains.

For assessment year 2022–23, the taxpayer produced the computation of income and an assessment order showing that the department had accepted capital gains that included gains from the sale of land. Her representative also said the same treatment had been followed for assessment year 2024–25, although no return or assessment order for that year was produced before the Tribunal.

The bench directed the Assessing Officer to verify the treatment for assessment year 2024–25 from the assessment records.

The Tribunal noted that the Assessing Officer and CIT(A) had proceeded on the basis that the taxpayer sold the land to various buyers. The taxpayer had, however, submitted that all the parcels sold during the relevant year went to one party.

The bench observed that this submission had been reproduced in the assessment order but appeared not to have been considered when the officer concluded that the land had been sold to different buyers.

It also noted that the taxpayer held substantial investments in financial securities and land and did not carry on business activity. In addition, she had consistently treated the acquisition of land as an investment rather than claiming its cost as revenue expenditure.

The Tribunal considered the distinction between a capital transaction and an adventure in the nature of trade, referring to decisions of the Supreme Court and the Gujarat High Court.

It noted that the character of a transaction depends on the combined effect of the relevant facts, including the intention at acquisition, the way the asset was treated in the books, the reasons for sale and the volume, frequency and continuity of transactions.

Applying those principles, the bench held that, on the facts of this case, the land had been sold as a capital asset and the resulting income was assessable under the head “Capital Gains”.

The taxpayer had claimed the gain as long-term, but the Tribunal said the holding period had not been examined and the material before it did not permit a conclusive finding on that point. It therefore directed the Assessing Officer to obtain evidence of acquisition and determine whether the land had been held for two years before its transfer.

The second major issue concerned ₹49,64,279 received from business trusts and claimed as exempt income.

The taxpayer’s investments included units in Embassy Office Parks REIT, Mindspace Business Parks REIT, Powergrid Infrastructure Investment Trust and REIT investments made through the portfolio management services route.

The Assessing Officer had treated the amount as taxable under “Income from Other Sources”. The CIT(A) upheld the addition.

The ITAT examined Sections 10(23FD), 10(23FC), 115UA and 194LBA of the Income Tax Act. It held that dividend distributed through a business trust is taxable in the hands of the unit holder where the underlying SPV has opted for the concessional tax regime under Section 115BAA. Where the SPV has not exercised that option and remains under the normal tax regime, the dividend distributed through the trust remains exempt in the unit holder’s hands.

The bench noted that the taxpayer had produced declarations and communications from the business trusts confirming that their SPVs had not opted for Section 115BAA. It also referred to Form 26AS, which showed tax deduction on the taxable interest component and no deduction on the dividend component.

On the basis of the statutory provisions and the documents placed before it, the Tribunal held that the ₹49.64 lakh had been correctly claimed as exempt and directed the Assessing Officer to delete the addition.

The taxpayer had also challenged interest charged under Sections 234B and 234D. The Tribunal held that those issues were consequential and did not require separate adjudication.

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